Clark v. CIR
| Decision Date | 30 April 1959 |
| Docket Number | No. 16010.,16010. |
| Citation | 266 F.2d 698 |
| Parties | Gene O. CLARK and Faye Clark, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
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Baird & Holley, Thomas A. Baird, Los Angeles, Cal., for appellants.
Charles K. Rice, Asst. Atty. Gen., Davis W. Morton, Jr., A. F. Prescott, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., for respondent.
Before BARNES, HAMLEY and JERTBERG, Circuit Judges.
Before us is a petition for review of a decision of the Tax Court1 involving asserted deficiencies in income tax against the petitioners for the years 1946 and 1947. The jurisdictional requisites appearing to have been complied with, this Court has jurisdiction by virtue of Section 7482(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7482(a), (Section 1141(a) of the Internal Revenue Code of 1939 as amended 26 U.S. C.A. § 1141(a)).
The Commissioner of Internal Revenue asserted certain deficiencies and fraud penalties against the petitioner Gene Clark for the calendar years 1946 and 1947, and deficiencies against his wife Faye Clark for the calendar year 1947. These deficiencies and penalties were redetermined by the Tax Court, and from this decision the parties have petitioned for review.
The facts as stipulated and found by the Tax Court appear essentially as follows: During the calendar years 1946 and 1947 the petitioners, Gene and Faye Clark, sometimes hereinafter referred to as Gene and Faye, resided in Los Angeles County, California, and all income derived by them during those years was community income. For the calendar years 1946 and 1947 they filed separate income tax returns on the community property basis, and for the calendar year 1948 they filed a joint return.
Prior to April 23, 1946, Gene Clark and Archie Koyl were associated in a business venture known as Gene Clark Plumbing Company, hereinafter referred to as the "company", consisting of two shops located in El Monte and Bell Gardens, California, and having a labor force of approximately 35 employees. The plumbing company was engaged primarily in selling plumbing supplies and rendering plumbing services to building contractors.
Gene Clark and Archie Koyl organized a California corporation, Gene O. Clark, Inc., now known as Atlas Pipe and Supply Company (hereinafter sometimes called the "corporation") on April 23, 1946, to engage in the wholesale plumbing business. Of the 522 shares of $100 par value stock authorized, 365 shares were issued to Gene, president of the corporation, and 157 shares to Koyl, vice president; one qualifying share was issued to another individual not involved herein. Gene acquired his shares at a cost of $36,500. His shares represented an ownership interest in the corporation of approximately 70 per cent.
On or about March 29, 1948, Gene purchased the 157 shares of stock owned by Koyl for $24,714.49. Thereafter, on March 1, 1949, Gene sold all of his stock to the Koyls, 262 shares to Archie, 260 shares to Fawn. For the period involved here then the proportional stock ownership in Gene Clark, Inc., can be summarized as follows:
Date Clark Koyl
April 23, 1946 to March 31, 1948 70% 30%
March 31, 1948 to March 1, 1949 100% ---
March 1, 1949 to April 30, 1950 --- 100%
Gene Clark, Inc., commenced its business operations on or about April 23, 1946, occupying the same premises as the plumbing company. Within a few months after the formation of the corporation, the inventory of the plumbing company and that of the corporation were commingled and were thereafter kept as a single unit. The only employees on the business premises were those of the corporation. No records were kept that could properly reflect any business transactions of any plumbing enterprise other than the corporation. The only book kept in the office that had any connection with the plumbing company was a check book on the Bank of America in El Monte. No federal tax returns were filed on behalf of the plumbing company for any period after April 23, 1946.
The plumbing company, however, existed for an indeterminate period after the organization of the corporation, solely for the purpose of buying and selling plumbing materials in violation of the then existent regulations of the Office of Price Administration (OPA). This was done because the plumbing company did not hold any license to do business which could be revoked if it were found guilty of violating OPA regulations. The plumbing company was to serve as a front in such transactions for the corporation which held a license to do business.
The corporation kept its books on an accrual method and reported its income on a fiscal year basis beginning with the year ending April 30, 1947. After incorporation of the plumbing enterprise, customers would frequently make out checks to Gene Clark, to the corporation, or to the plumbing company. To obviate the resultant confusion, the corporation adopted a rubber stamp showing all three designations in order that it might properly endorse any check. This composite stamp was used throughout the period here in question.
Until he sold his entire interest to the Koyls in March of 1949, and during the years in question here, Gene was in general control of all of the corporate operations and dictated its financial policies. Clark was in full charge of the main office in El Monte, Archie Koyl directed the activities at the shop in Bell Gardens. Virtually all other corporate activities, including the maintenance of corporate records and the disposition of receipts, were under the direct control of Clark.
Fred Files, comptroller and office manager of the corporation, worked under the immediate supervision and direction of Clark. Files' duties consisted primarily of handling receipts and keeping proper office records. He worked at both shops, keeping one set of books for the entire operation, though consecutively numbered duplicate receipt books were maintained in both shops. When cash was received from a customer, the amount thereof was recorded in the receipt book which was, in substance, merely a memorandum that was later transferred to the cash receipts journal in the books of account. Cash sales were sometimes totaled daily and sometimes only several times a week. A single "cash receipts" figure was usually recorded in the journal for the total amount of the separate sales. Deposits of the total cash receipts were made in the corporation's bank account, and generally recorded weekly in the cash receipts journal. Files, who handled all of the bank deposits of the corporation, regularly deposited all cash receipts of the corporation which were turned over to him for such purpose by Clark. On a number of occasions, however, Clark instructed Files to set aside the cash proceeds from certain sales and to turn such funds over to him without recording the sales on the books. Also, at different times, Clark would give Files checks made out to the corporation by customers for sales, which sales were unrecorded on the corporate books, in exchange for the cash taken by Clark. An undetermined part of such cash proceeds was used to cash checks in relatively small amounts ranging up to $100, as an accommodation for neighborhood stores and workmen.
There was a substantial but undetermined difference in the amount of cash Files recorded in the corporate books or deposited in its bank account and the amount of cash sales actually made by the corporation. This method of handling cash sales was also the general practice of the company, and was not altered by the coming into existence of the corporation during the taxable periods involved herein.
Between May 1946 and December 1946, Clark, on behalf of the corporation, frequently sold and shipped plumbing materials from the El Monte yard without any entry being made for the transactions in the corporate records. Some of such shipments represented "trading transactions" or non-profit exchanges of materials with competitors for mutual convenience.
Subsequent to December 1946, Clark frequently sold and traded plumbing equipment on behalf of the corporation. He also sold and traded used vehicles. Files was not supplied with the appropriate sales slips and proceeds on many of these transactions. Sometimes Clark would simply give the comptroller a check, without adequate details connected with the sale, and instruct him to remove the particular asset from the corporate books.
During 1947, when maximum ceiling price regulations were in effect under the Office of Price Administration, Clark engaged in black market activities. When he dealt in such illicit activities, Clark would generally pay an undisclosed amount of cash for the purchase of materials over the price indicated on the invoice. These cash funds were taken from unreported corporate receipts. The over-ceiling cash payments were not recorded on the corporate books as part of the total cost of the illicit purchases. Neither Clark, the company, nor the corporation reported the profits from such illegal sales transactions.
During each of the taxable years in question Clark also had an arrangement with Keenan Pipe & Supply Company whereby he was able to purchase materials on behalf of the corporation at one-third off for cash. Under this arrangement, indeterminate amounts of such purchases were made and paid for, usually with receipts obtained from unreported corporate sales, the parties agreeing not to keep any records of their cash transactions.
Apart from the foregoing modus operandi, during each of the years involved herein, Gene Clark, Inc., made numerous purchases of plumbing materials in the normal course of business which were not recorded on the corporate books. The subsequent sales thereof were likewise...
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